Best Interests Duty leads to churn accusation

As the insurance industry restructures its premiums in the face of rising claims, advisers who act in their clients’ best interest by moving them into cheaper policies are being accused of ‘churning’, according to non-bank dealer group ClearView.

Life insurers have seen income protection and lump sum claims increase, and lapse rates have also headed upwards, said Mr Swanson.

In recent years, life insurers’ lump sum business and term life books have subsidised income protection portfolios, he said.

But as mortality has improved, income protection claims have materially deteriorated, said Mr Swanson.

The increase in income protection claims is a combination of increased mental illness claims, falling insured incomes and “difficulties in people returning for work because, for many, their job no longer exists”, he said.

The industry has responded by investing in better claims management techniques, said Mr Swanson – but that is unlikely to be enough.

Insurers have also started to increase income protection premiums for their ‘old’ portfolios, but that has created a price differential with new business premiums, which can be significantly cheaper, he said.

“The problem with this is that the customer is worse off with the increase and can be upgraded by their adviser to a new policy (with potentially better features) on lower premiums,” said Mr Swanson.

“Advisers taking such action with their clients are putting the customer first and acting in their best interests – others in the industry want to call it ‘churn’,” he added.

Furthermore, some “ill-informed” members of the life insurance industry (along with some external commentators) have started an “emotional attack on commissions that are paid to financial advisers for life insurance, especially upfront structured commissions”, said Mr Swanson.

The attacks stem from pricing differences rather than the “rational” commission structures themselves (whether they are upfront or level), he said.

“An adviser doing the right thing by their client has an obligation, morally and now at law (that is, best interests under FOFA), to provide their clients with a better alternative – that is to potentially move from outdated, expensive and/or poor terms policies to a better outcome – irrespective of commission structures or the remuneration of the financial adviser,” said Mr Swanson.